Crowell Roberts Investment Blog

At England’s Wimbledon Stadium, two lines from Kipling’s “If” appear above the doors leading from the dressing rooms to the famous Centre Court. They read, “If you can meet with Triumph and Disaster, and Treat those two imposters just the same.” There is an inspiring short video on You Tube of the poem read by the great players Roger Federer and Rafael Nadal. In the less competitive world of investing, players would do well to keep this lesson in mind.

Unfortunately, many do the opposite, equating news of a downturn in the stock market with a disaster and selling, then buying after a rally for fear of being left out. Mutual funds suffer the burden of being a popular choice with these investors, who react rather than anticipate. In April of this year, buyers put over $6 billion into U.S. stock funds as the market hit its highest point of the year. May then brought the steepest dip since February of 2009 and “investors” afterwards reacted by taking $15 billion out of these same funds.

That was the biggest withdrawal since March 2009, when the averages hit a 12-year low before beginning an advance of more than 50% over the next 12 months. Most investors could improve their returns by bearing the Kipling poem in mind and heading the opposite direction from the emotion-driven herd.

That is not easy but one big step is creating a center core on one’s capital, whether it be measured in only a few dollars or millions, to be kept in relatively low risk but long-range return investments. This should hopefully be something more than the almost insultingly low returns from money market or other demand deposit accounts, perhaps a closed end bond fund like Credit Suisse Income (CIK-$3), paying over 9% in monthly dividends from higher yield corporate bonds.

Like most worthwhile investments, its value will fluctuate but the goal of investing is to produce satisfactory returns over time, not to avoid fluctuations. Most investors exaggerate the value of predictable results, as if they were corporate treasurers required to produce a fixed sum at some future specified date. I suspect this reflects some inner desire for control, which should probably be addressed by competent therapists, rather than through mediocre returns in fixed rate investments in the current low rate environment.

Apple (AAPL-$273) has certainly not been a mediocre investment. In February, when it was $200, I recommended it again, mentioning a $300 price target by 2014. It now looks as if it will reach $300 before 2011. One advantage of accepting that investment results need not be controllable is that they have the power to exceed our expectations. Apple has sold over 3 million iPads in a couple of months and is rapidly expanding the profitable licensing of “apps” for it, just as it has for its iPhones. This is a market sector that didn’t even exist until recently.

Apple has a cash hoard of $42 billion, more than any other company in the S&P 500. It may someday use this cash to initiate dividends but investors who prefer cash now with their tech stocks can buy Intel (INTC-$21, 3% yield) or IBM (IBM-$130, 2% yield.).

In smaller companies, Internet facilitator Akami (AKAM-$45) continues to add clients and recently raised its 2010 forecast. My newest buy is Atheros Communications (ATHR-$31), another Silicon Valley company that provides technology that facilitates other advanced products. Its field is communications, particularly wireless and high-speed broadband. It also recently raised its 2010 forecast.

Continuing uncertainties over offshore drilling favor companies with solid onshore capabilities like Occidental (OXY-$84) and Concho (CXO-$58). Core Labs (CLB-$155 has unique strengths in maximizing existing fields.

The media exaggerate recent market dips; they are “imposters” rather than “disasters.” I suggest price targets 8-10% higher by year-end for all stocks listed here.

Despite all the loud clamoring that accompanies stock market swings, investors may sometimes wonder where to find real gains. There are reasons for this wondering. The Dow Jones Industrial Average first touched 10,000 in the closing days of the prior century on March 16, 1999. Since then, it has wandered back and forth through this round number threshold 63 times and now stands only slightly higher than it did eleven years ago.

Before quitting the whole thing, investors should bear in mind that dividends will improve investment results as can staying with the right stocks rather than passive adherence to some index.  Apple (AAPL-$260) is up 2700% since 1999, General Motors down 100%.

Looking even further back, the Dow first touched 1,000 in early 1966. It fell back as if scared, made a couple of feeble tries at 1,000 in the early ‘70’s but didn’t get above it to stay until later in 1989. The next ten years then saw a tenfold increase in the Dow to 10,000 as computers and the Internet lifted productivity, interest rates fell and a period of innovation and eased global trade developed.

That increase is a reminder to investors who are brooding about May of 2010 being an unusually rotten month that such down months are an anomaly. One reason smart investors always keep capital in the stock market is that these growth spurts happen periodically. I’m sure no financial columnist back in 1989 predicted a 1000% market gain over the next ten years nor am I doing so now. What I am predicting is that an investor fortunate enough to have capital to commit to the stock market will be rewarded by stocks in carefully chosen and occasionally pruned growing companies.

Apple certainly qualifies as do Google (GOOG-$498) and Amazon (AMZN-$127). None pays a dividend so the possibility of a stagnant market suggests pairing them with those that do. Alliance Global High Income (AWF-$13) and Credit Suisse Income (CIK-$3) currently yield 9% in monthly dividends from diversified bond portfolios. These hold second tier bonds but their high yield compensates for the minor default risk. Permian Basin Trust (PBT-$19) has a similar yield but its oil royalty distributions require an additional tax form that some investors find annoying.

Looking ahead requires taking note of the playing field or “pitch,” this being World Cup time. Interest rates and inflation, which held back stocks during both the ‘70’s and the ‘80’s continue at record lows. Sadly, unemployment seems stuck at unacceptable high levels and unlikely to get any help soon from the labor-intensive housing and construction industries. We can thus expect the Federal Reserve to continue to nurse the recovery along with low interest rates, probably for at least two years.

This policy will be good for the bond funds mentioned earlier. It will also favor companies in favorably positioned sectors where they can continue their recent earnings and dividend growth. Intel (INTC-$21) is one of my favorites in the innovative tech sector. Its stock pays a current 3% yield and the company has increased the dividend for 17 straight years. Intel recently increased its sales forecast for the current June quarter to $10.3 billion. Earnings will be way ahead of last year’s depressed figures and it will earn $1.85 to $1.90 for the full year, a very reasonable valuation for a dominant tech leader.

IBM (IBM-$130) is similar with a 2% yield and 15 consecutive years of dividend increases. DuPont (DD-$38) is more sensitive to the pace of the economic recovery but recently reaffirmed its forecast for 10% sales growth and 20% earnings growth through 2012. Earnings will be $2.50 to $2.70, another relative bargain, and the yield is 4.4% with 19 straight ups.

Rather than guess at market direction, investors should focus on the path to take. Stocks like these make all the difference.

Stocks continue to rise and fall like boats moored to a buoy, bobbing up and down with the tides. There are no shortages of discouraging news events, most recently with a currency crisis in Europe, a naval conflict between the Koreas, the terrible oil spill in the Gulf of Mexico and a naval confrontation near the perennially inflammable area of Gaza. Such events keep slapping stocks back despite persisting low interest rates, rising corporate earnings and moderate stock valuations.

These favorable factors have been in place for months and investors seem to be waiting for some new good news. They may have to wait until late summer when we get the next round of quarterly earnings reports or even the fall when we are being told we can expect the oil spill to be capped. Global economic recovery continues but its pace remains agonizingly slow.

The oil spill may have further disruptive effects. Hurricane season is already here and any storm would set back the corrective efforts. The loss of life, of livelihoods and the damage to innocent wild life already far exceeds that of the Three Mile Island partial meltdown in 1979 that took no lives but crippled the growth of nuclear power in this country.

Use of nuclear power continued to grow in Europe and Asia and one could speculate that there might not have been overly aggressive deep water drilling off our shores if the U.S. had kept pace. In increasingly complex societies, actions often lead to major unintended consequences.

The Exxon Valdez environmental disaster of 1989 led to an oil spill liability law with a cap of $75 million, that is now at issue in the current BP debacle. Early in the Valdez litigation, a jury assessed a $5 billion punitive damages award against Exxon. Pending appeals, Exxon obtained a $4.8 billion credit line from J.P. Morgan & Co. That was big money in those days and Morgan reduced the amount of capital it would have to set aside by creating the first modern credit default swap transaction. Similar swaps later became instrumental in the failures of Bear Stearns, Lehman Brothers and AIG.

The consequences of the current environmental disaster are unknown but overdue restrictions on offshore drilling and requirements for greater disaster prevention equipment and procedures seem sure to come. The U.S. gets 25% of its oil and gas production from the Gulf and another substantial portion is exported. New production rules will add costs, inevitably resulting in higher oil prices. I expect we will again see $100 oil prices, probably by next summer.

This country consumes more gasoline than Europe, Asia, Africa and South America combined. It’s a big country and we love to drive in it. I think our gas usage is not an addiction but a bad habit that we can modify, spurred on by higher gas prices and higher fuel taxes. One consequence of this latest disaster might even be creation of a national energy policy that would provide realistic support for nuclear, solar, wind and other alternative energy sources.

Let us hope. In the meantime, I suggest looking for energy companies with less reliance on offshore drilling, particularly in U.S. waters. Occidental Petroleum (OXY-$80) qualifies nicely. Established land operations in the U.S. account for 58% of its assets, the Middle East and Latin America for the remainder. It yields 1.9% and has increased its dividend for the past seven years.

Permian Basin Royalty Trust  (PBT-$18) pays over 9% in monthly distributions from its interests in royalty rates in older Texas fields. In the same West Texas basin, I also recommend Concho Resources (CXO-$55), an independent oil and gas producer that is aggressively exploring the Permian Basin as well as emerging oil and gas shale fields.

New earnings reports seem likely to be quite strong. Such new good news would probably be welcomed with an overall stock market surge.

One of the consequences of our modern world is living with increasing complexity. The currency fluctuations of the Euro hardly concerned us a few years ago, in fact, the Euro didn’t even exist but now it gets blamed for declines in our stock accounts. It’s been said that there are more bits of information in a single newspaper today than would have impacted the lifetime of a rural peasant in the Middle Ages, stopping work in the field when the church bell rang.

This proliferation of media inputs is accelerating our overloads as providers of data compete for our attention and our wallets.  Certainly, the wisdom for successful investing will not be found in reacting to news events like currency fluctuations.

Eliot, who was not always gloomy, having received a posthumous Tony award for the book for the musical “Cats,” later wrote, “Only by acceptance of the past will you alter its meaning. Every moment is a fresh beginning.”

The financial crisis is in the past although its effects linger and the hunt for scapegoats will continue until people lose interest. Investors have a continuing opportunity, an obligation if they are professionals, to take a fresh look at their stocks and the alternatives. There are always uncertainties but the first step is to check the terrain, currently marked by amazingly low interest rates and continuing investor skepticism, both favorable factors for investing in stocks.

One dominant uncertainty is the extent and duration of the recovery in our economy. Beginning with recovery from the Great Depression of the 1930’s, the government has become a steadily larger part of the US economy. Many blame this larger role as the root cause of all problems. Whether this is true or not, and I believe picking it as a scapegoat oversimplifies matters, political opposition to job creation and other economic stimulus is slowing the pace of recovery.

One increasingly respected new indicator is the USA Today/HIS Global Insight Economic Outlook Indicator, which can be found at www.usatoday.com/money/economy/economic-outlook.htm. Its recent monthly update shows strong growth rates in April and May, followed by slower but still solid forecast growth in June through October. Both consumer and business spending are fueling a surge but tight credit, debt levels and persisting unemployment are keeping the economy below highway speeds.

This innovative index is a product of IHS (IHS-$51), a unique economic analysis firm conducting a global consulting business from Boulder, Colorado. Sales are approaching $1 billion, growing at 12% in a challenging economy. Earnings are keeping pace and IHS forecasts $2.87 earnings per share this year, a reasonable P/E of 18.

As this indicates, success comes from the transformation of data collection and management into applied knowledge and its wise applications to markets. Apple (AAPL-$264) is a prime example of such success, BP and Transocean of failure. As stocks, the latter two have probably been battered down to long-range value territory but the question today is how low their prices will go while for Apple, it is how high.

Our complex society rewards technological wisdom. That will not be found in gold, whose long-term record only matches the inflation rate and inflation is not a current worry. Dividend-paying, savvy companies are trading at attractive valuations. Some of the bigger candidates are IBM (IBM-$126), Coca-Cola (KO-$52), 3M (MMM-$79), United Technologies (UTX-$67), GE (GE-$16), DuPont (DD-$36) and Merck (MRK-$34).

The uncontrolled oil spill in the Gulf is brewing a sea of troubles. One consequence will be increased costs for new exploration, an advantage for energy giants like Exxon (XOM-$60). It should close its buy of XTO (XTO-$42), a favorite of mine, later this month.

The continuing backsliding in stock prices has taken the overall market into a 10% “correction.” During the market’s almost uninterrupted 60% surge from March 2009 to the spring of this year, popular market commentators kept warning us that we could expect a 10% “correction” at any time. Well, they finally got the “correction” they had been predicting and now these commentators are proclaiming that their predicted “correction” is the end of the market rally.

They could be right, of course, but this looks to me more like those moments in a football game where overeager players anticipate a play and jump offside. The resulting five-yard penalty seldom changes the outcome of the game. This does not look like a game where an outweighed team is steadily forced back play after play. The momentum of the global economic recovery from the financial crisis was checked by fiscal problems in Southern Europe but not reversed. Momentum is a powerful thing.

So is irrationality. John Maynard Keynes, British economist and successful stock portfolio manager, said, “The market can remain irrational longer than you can remain solvent.” Weakness in Greek government bonds recently irrationally expanded into down markets for global stocks, energy prices and even the price of gold, the traditional haven in times of trouble.

Price weakness across the board in all asset classes is often due to selling by overly leveraged holders who must meet the demands of their lenders by selling whatever they can, not what they should. The resulting irrational markets provide opportunity for investors who have preserved capital reserves. This indicates the way to take advantage of Lord Keynes’s observation, not by complaining about irrationality but taking advantage of it.

This requires avoiding borrowing, committing only capital not likely to be needed for other needs, sticking to quality investments and avoiding reacting to news events or popular trends. These disciplines are rewarding. Over the last 20 years, the S& P 500 stock average has yielded slightly over 8% annualized. Meanwhile, the average stock fund investor has made 3% annually.

The primary reason for this difference seems to be selling during market dips from fear, never a rational force. This is aggravated by ego-driven attempts to avoid any perceived losses, thus the huge amounts of cash still held in money market funds despite their almost invisible yields. Studies suggest that some investors even equate a loss of personal control over investments as an investment loss and insist on deposits in their local branch bank to insure only their own hands are on the controls.

Better returns are available without going to the other extreme and tossing your capital to people like Bernie Madoff. I continue to recommend closed-end bond funds like Alliance Global High Income (AWF-$12) or Credit Suisse Income (CIK-$3). Their share prices dipped along with everything else but neither owns Greek bonds, their income streams were unaffected and each now yields over 9%, paid monthly.

Even better potential lies with stocks of dividend paying growing companies. Clorox (CLX-$63) and Occidental Petroleum (OXY-$79) both raised their dividends and forecast continuing growth. Insurance companies MetLife (MET-$39) and Prudential (PRU-$56) have enduring cash flow. DuPont (DD-$35) has survived business cycles since 1802 and yields 4.5%. Core Labs (CLB-$1301) is ideally placed to benefit from maximizing use of existing oil reservoirs and shale deposits. Apple (AAPL-$245) and Google (GOOG-$477) don’t pay dividends but their growth adds rational returns in an irrational world.

Corrections happen and markets fluctuate. It is their nature. Keep your capital working for you. Avoid leverage. Stay rational.

Stock prices have slipped a bit while earnings forecasts have gone up. The result is an enhanced shopping list of quality stocks. With the U.S. economy beginning to pull ahead from the Euro zone and China putting on the brakes to ward off inflation, the prospects continue to improve for a significantly higher stock market by year-end.

Investors have not lacked attention-grabbing financial news in recent weeks. Shady dealing in high places and a major oil spill were followed by currency upheavals in Europe. These inspired a run of three-digit changes in the Dow Industrials, punctuated by a still unexplained thousand point dive in a few minutes. After all this sound and fury, the Dow is ahead a rousing 1% for the year-to-date.

The impact of struggling economies in Southern Europe on the overall global economy is a continuing story. Its impact on stock markets has been exaggerated, aided by frequent television reruns of rioting in Athens as background for unrelated stories of market fluctuations. Economic integration of Europe has been a long and largely successful work still in progress. Its common currency is an integral but not absolutely essential element while its liberalized cross-border trading remains intact.

The root cause of the Euro crisis lay in the still uneven global recoveries from the worldwide financial crisis. This now seems recognized as starting from excess borrowing everywhere, particularly in U.S. subprime mortgages, correction from which remains a work also still in progress.

The overriding catalyst remains the global economic recovery. This will continue with regional fits and jerks so long as the world continues the process of liberalized free trade. China, the elephant in the room, has been missing from the financial news while we were being shown riots in Greece. It seems currently to be on some sort of retreat while it rethinks the impact of its own success on inflation and its currency. It will be back in the news, demanding that attention be paid.

Meanwhile, weakness in the broader European market makes shares in GlaxoSmithKline (GSK-$34) more attractive. This is a substantial global pharmaceutical company with $42 billion in sales and a 5% dividend yield. Its debt load is high and it comes with the usual burden of uncertainties from drug regulations and litigation but offers good value with interesting new drugs in its pipeline.

Oil prices dropped 20% over the last month, apparently due to concerns from a weakened Euro zone economy. This seemed a bit much for such a global economy and prices are edging up again. Occidental Petroleum (OXY-$82) raised its dividend for the eighth straight year. Typical of its widespread activities, it is currently in a new venture with Korea Gas Corporation to develop a large field in Iraq. I continue to recommend building stock portfolios around quality core companies like Oxy that have proven their abilities to succeed in volatile markets.

Among consistent dividend boosters, less well-known Sigma-Aldrich (SIAL-$54)  has provided shareholders annual increases for 28 years. The St. Louis based company has over $2 billion sales worldwide of over 130,000 different products to support scientific research. Both sales and earnings are growing at around 10%, debt is reasonable and its valuation leaves room for growth.

Market volatility is producing more heat than light. Investors who stick to growing companies can use recurring flurries of panic to enhance their returns. As Kipling recommended, keeping “your head when all about you are losing theirs” works well in investing.

After recent wild fluctuations in the stock market, it would certainly be understandable if an investor decided to never go near stocks again. It would also be a mistake. The remedy is to ignore the siren calls of daily market news and rumors while holding stocks with sufficient financial strengths and earnings power to keep them on course during these periodic storms. I try to guide readers on that course, which has been working well, although there were a few moments recently when I wondered if my life might have been less eventful if I had remained as a Navy jet pilot.

It would probably also have been shorter, a reminder to me and to readers that a longer-range view is usually helpful in times of stress. In these times, that demands realizing that recovery from the greatest financial crisis since the Depression has been merely punctuated by the trials of Goldman Sachs, a major oil spill in a vital oil producing region and rippling fiscal crises across Southern Europe. These are major problems with uncertain outcomes yet even their aggregate is not sufficient to reverse recovering global growth, now in its second year.

The unemployment rate remains painfully high and sectors like housing are still in intensive care, but the overall momentum is unchecked. One major difference between this recovery and the failed government actions in the 1930’s is today’s pumping of funds by the world’s central banks into their economies. These actions are keeping interest rates low, one of the most key factors for investors to consider in comparing investments.

Interest rates are likely to rise sooner in Europe than in the U.S. under the impact of the pressures on European currencies. That provides a shield that should give the U.S. a few months grace as a stronger dollar strengthens its fiscal balance sheet, helping the Fed keep interest rates low and encouraging growth in businesses here. U.S. stocks thus seem more favorably positioned at this time.

With so many prevailing uncertainties, the stability of larger companies is valuable. DuPont (DD-$38) just raised its earnings guidance for 2010 to a range of $2.50 to $2.70. That would be a solid increase from 2009’s $1.94 and is accompanied by a 4.5% dividend yield. Its chemical and coatings businesses are improving and its agriculture lines are gaining market share. The company has a substantial debt load, thus the combination of low interest rates and a recovering economy are particularly advantageous to it.

Cummings (CMI-$72) is a new buy recommendation. This old-line Indiana-based company makes diesel engines and other lines of heavy equipment used all over the world. Sales of its big rig trucks fell below their replacement rate when the Recession loomed into view, leaving the age of the U.S. trucking fleet at a twenty-year peak. Demand for replacement is building, spurred by tighter emission standards.

This heavy equipment sector has substantial inertia and sales will probably not show significant increases until the end of this year. Current earnings estimates are for $3.50 this year, up 40%, and for more than $5.00 next year. The yield is only 1% but this is a classic cyclical growth play and a dividend increase is likely in a few months.

The energy sector remains volatile, as usual. Core Labs (CLB-$143) is another new buy. This savvy technological energy company provides techniques that enhance oil and gas production from existing reservoirs. With offshore drilling under a cloud and exploration increasing of shale deposits, it has a commanding niche. Earnings estimates this year are for nearly $6.00, increasing by at least 20% in 2011.

Amid the sound and fury, stocks continue to offer promising returns to thoughtful investors.

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After recent wild fluctuations in the stock market, it would certainly be understandable if an investor decided to never go near stocks again. It would also be a mistake. The remedy is to ignore the siren calls of daily market news and rumors while holding stocks with sufficient financial strengths and earnings power to keep them on course during these periodic storms. I try to guide readers on that course, which has been working well, although there were a few moments recently when I wondered if my life might have been less eventful if I had remained as a Navy jet pilot.

It would probably also have been shorter, a reminder to me and to readers that a longer-range view is usually helpful in times of stress. In these times, that demands realizing that recovery from the greatest financial crisis since the Depression has been merely punctuated by the trials of Goldman Sachs, a major oil spill in a vital oil producing region and rippling fiscal crises across Southern Europe. These are major problems with uncertain outcomes yet even their aggregate is not sufficient to reverse recovering global growth, now in its second year.

The unemployment rate remains painfully high and sectors like housing are still in intensive care, but the overall momentum is unchecked. One major difference between this recovery and the failed government actions in the 1930’s is today’s pumping of funds by the world’s central banks into their economies. These actions are keeping interest rates low, one of the most key factors for investors to consider in comparing investments.

Interest rates are likely to rise sooner in Europe than in the U.S. under the impact of the pressures on European currencies. That provides a shield that should give the U.S. a few months grace as a stronger dollar strengthens its fiscal balance sheet, helping the Fed keep interest rates low and encouraging growth in businesses here. U.S. stocks thus seem more favorably positioned at this time.

With so many prevailing uncertainties, the stability of larger companies is valuable. DuPont (DD-$38) just raised its earnings guidance for 2010 to a range of $2.50 to $2.70. That would be a solid increase from 2009’s $1.94 and is accompanied by a 4.5% dividend yield. Its chemical and coatings businesses are improving and its agriculture lines are gaining market share. The company has a substantial debt load, thus the combination of low interest rates and a recovering economy are particularly advantageous to it.

Cummings (CMI-$72) is a new buy recommendation. This old-line Indiana-based company makes diesel engines and other lines of heavy equipment used all over the world. Sales of its big rig trucks fell below their replacement rate when the Recession loomed into view, leaving the age of the U.S. trucking fleet at a twenty-year peak. Demand for replacement is building, spurred by tighter emission standards.

This heavy equipment sector has substantial inertia and sales will probably not show significant increases until the end of this year. Current earnings estimates are for $3.50 this year, up 40%, and for more than $5.00 next year. The yield is only 1% but this is a classic cyclical growth play and a dividend increase is likely in a few months.

The energy sector remains volatile, as usual. Core Labs (CLB-$143) is another new buy. This savvy technological energy company provides techniques that enhance oil and gas production from existing reservoirs. With offshore drilling under a cloud and exploration increasing of shale deposits, it has a commanding niche. Earnings estimates this year are for nearly $6.00, increasing by at least 20% in 2011.

Amid the sound and fury, stocks continue to offer promising returns to thoughtful investors. Price targets for this group are 25% above present levels by year-end.

The aftermath of the financial crisis continues to lap around the edges of the financial world like a giant oil slick. This is certainly understandable as the first year of this slump was every bit as bad as the Depression. Worldwide industrial production fell as steeply and worldwide financial markets were even more disrupted. While the pace of the recovery may be disappointing, the recovery is far better than the death spiral that continued from 1929 to 1933.

The difference is in the actions taken by governments. Rather than cut spending in an effort to balance budgets and raising interest rates to preserve the gold standard, today’s leaders have been willing to risk deficits while pumping funds into the economy. While the pace of recovery still lags that needed to get the economy back to full speed, the result of these efforts has led to an end of the recession and the beginnings of a climb to recovery.

Concerns still run high as shown by the continuing interest in the Inquisition of Goldman Sachs. While Goldman may have strayed from the ethical path, almost a dozen other merchants of debt also promoted even larger amounts of pools of subprime mortgages. A new economic history, This Time is Different: Eight Centuries of Financial Folly by Reinhart and Rogoff, attributes blame for the most recent crisis and its predecessors going back to ancient Greece to the creation of too much debt, public and private.

There were many culprits besides Goldman, including those who borrowed on their houses to buy wide screen televisions or even more houses. We are all paying now for these waves of borrowing and it is remarkable that the global recovery efforts are working as well as they are. Our much-maligned politicians end up with the responsibility for providing tools to clean up the mess. They have to broker their prospects for reelection amid emotionally charged political viewpoints of commentators and constituents while sorting out frequently conflicting advice from economists.

Most agree on the dangers of debt and all on those coming from debt that is not repaid. Goldman Sachs, for all its faults, paid its bills, unlike some of its competitors who are no longer with us. The threat of loan defaults always rattles financial markets, particularly when nations threaten “sovereign default.”  The recent echoes by Greece of the debt default problems of ancient Athens scared European investors with ripple effects in U.S. markets.

The global economy has become so intertwined that it is increasingly difficult to relate cause and effect. In this case, however, the problems in the Euro area are weakening that currency with corresponding rebounding support for the dollar. That typically makes exports more expensive while reducing the costs of imports. It also tends to improve government balance sheets and should thus add a few more months in the U.S. to the current period of record low interest rates.

That will favor U.S. stocks, particularly those that can show earnings growth and dividend increases during this challenging economic transition. IBM (IBM-$127), which just raised its dividend for the 15^th straight year, comes to mind. Even though their valuations are tempting, fickle markets make me avoid stocks whose reputations are endangered, like Goldman Sachs, BP, Transocean and Cameron. As the villain Iago said in Othello, “Reputation is an idle and most false imposition; off got without merit, and lost without deserving.” In today’s world, Iago would probably be with a mortgage fund.

The market’s rumblings are yielding overdue strength in U.S. medical stocks. Merck (MRK-$36), Bristol-Myers (BMY-$25) and Pfizer (PFE-$17) are stepping out of the wings to renewed applause. All three have above average yields and solid earnings prospects.

When analyzing stock portfolios, professionals first sort them by size, as the larger positions will point the way to future returns. The ten largest positions in my client portfolios include Apple (AAPL-$262), XTO Energy (XTO-$48), Intel (INTC-$23), Google (GOOG-$530), IBM (IBM-$130) and Novo-Nordisk (NV)-$80) among growth stocks. Income stocks Annaly Mortgage (NLY-$17), ING Global REIT ($8), Franklin Trust (FT-$6) and Alliance Global Government (AWF-$14) provided excellent stability as the market struggled and continue to add above average dividend yields.

In the coming months, I plan to reduce the income group as the global economic recovery gains momentum. That will eventually lead to higher interest rates with accompanying pressure on the bond market. I expect the XTO positions to convert through merger in the next few weeks into Exxon (XOM-$69), which seems destined to remain within my top ten.

As that may indicate, I try to follow Mr.Buffett’s advice in this and other areas through having my favorite holding period as “forever.” That does not mean simply buying and holding stocks without paying continuing attention to possible fundamental weaknesses developing in their management or market sectors. It does mean developing the wisdom to distinguish stock price dips stemming from internal weaknesses from the fainting spells coming from overall stock market selling.

One mistake investors make is to obsess on the price paid for a stock (which has no bearing on its future stock action), selling at the first chance to “take a profit,” sometimes saying “You can’t go broke taking a profit.” Well, that might be true but you can certainly end up with insipid investment returns. Our returns would be much less if we had “taken profits” on Apple and its brothers. The trick is to avoid this temptation while conducting an ongoing search to try to find the next Apples.

One could search for businesses started by two guys in a California garage, as were both Apple and Hewlett-Packard, but that’s too restrictive. The stocks in my top ten and the contenders got there by searching for companies able to consistently produce superior earnings growth while staking out business positions that give them a competitive edge in markets or products. Mr. Buffett calls these “moats.” He also comments that the best stock to buy may already be in your portfolios and those others named in our top ten are all buys.

I suggest emphasizing larger companies during the still fragile current period of economic recovery. Dividends help and IBM, commonly not considered an income stock, just raised its dividend again, bringing its yield to 2%. Intel yields 2.6% and also has a history of periodic dividend increases. Both easily beat the ridiculously minute yields from the money market funds to which many investors are still fearfully clinging.

Contenders in our second ten include Aflac (AFL-$53), America Movil (AMX-$50), Amazon.com (AMZN-$142), Cisco Systems (CSC)-$27), DuPont (DD-$40), China Life Insurance (LFC-$68), Life Technologies (LIFE-$51), Merck (MRK-$35), Syngenta (SYT-$49) and Waste Management (WM-$35).

Technological capabilities will be increasingly essential for business success. Other strong buys thus include Johnson Controls (JCI-$33), Oracle (ORCL-$26), 3M (MMM-$88), Teva Pharmaceutical (TEVA-$60) and United Technologies (UTX-$74). Bank stocks are in a catfight and I prefer insurers in the financial sector. Besides Aflac, Prudential (PRU-$62) and MetLife (MET-$44) are attractive.

The stock market appears to be pausing for breath. This presents opportunities for upgrading to better stocks like these.

After two months of consecutive weekly gains, stocks chalked up a down week. The market was due for a dip although credit was given to the SEC suing Goldman Sachs (GS-$165) for alleged failure to disclose all the risks in a custom portfolio of subprime mortgages. I am reminded of Captain Renault (Claude Rains) in “Casablanca” saying that he is “shocked, shocked to find that gambling is going on” just before he pockets his winnings.

Wall Street typically overreacts to news of litigation. While scars of the subprime crisis are still sufficiently visible to give legs to this story, its impact will lessen “as time goes by.” Meanwhile, Goldman Sachs is trading at 7 times 2010 earnings, the lowest among any of the big financial companies.

Earnings reports for the first quarter of 2010 will dominate financial news over the next month. Expectations are high, possibly too high, and some inevitable disappointments may trigger a 5 to 10 percent pullback in the market.
That happened earlier this year when stocks lost 8% from January 19 to February 8 in the middle of the prior earnings reporting season. After further reflection, the rally resumed and stocks are currently ahead 6% for this year.

Much of the excitement has focused on financial stocks like JPMorgan Chase, which made headlines with improved earnings. Earnings for the bank sector could hardly fail to improve after its disastrous comparative prior performance and most of the gains came from trading as credit card and real estate operations remain plagued with loan losses.

Intel (INTC-$24) produced an even stronger earnings report, accompanying it with a forecast of further increases in sales and earnings. It has almost no debt, yields 2.6% from a regularly increased dividend and is the leader in an essential technological sector. Intel and other well-placed industrial and technological stocks seem better risks than almost any bank stock.  It will take more than a quarter before their balance sheets are completely purged of bad loans.

The American consumer is not waiting for improved balance sheets or full employment to resume buying. Retail sales are rebounding and a glance in any Apple retail store shows that the slowdown is over in high-end retailing.

Nordstrom (JWN-$43) is on the upswing. Earnings are headed from $2.50 this year to $3.00 next year. Debt is a bit high but manageable. The current yield is 1.4% but a boost is likely. Coach (COH-$42) is also picking up speed. Polo Ralph Lauren (RL-$60) is also attractive. This high-end group would probably dip more if stocks have a slight swoon and should thus be kept in mind, if that event develops, as the economic recovery is gathering strength and their rebound would be swift.

The recession sharpened consumer shopping skills and lower-end retailers are benefiting. TJX (TJX-$45) continues to expand its TJ Max stores. Big Lots (BIG-$38) is tempting but I prefer the modest but growing dividends from TJX.

Google (GOOG-$55) showed the sensitivity of this market when it sold off despite excellent earnings progress, apparently on concerns that its expenses were up. It is reasonably valued on less than 20 times 2010 earnings although its stock price will be volatile.  Apple (AAPL-$245) is similar. Only two months ago, I suggested here a $300 price target in two years and it’s almost halfway there already on strong iPad sales.

As Intel’s earnings pointed out, big tech companies are boosting sales of business equipment and software. IBM (IBM-$130) rang the bell with its earnings report that beat estimates and is trading for only 11 times earnings while yielding almost 2%. “The fundamental things apply . . .”